I am looking for suggestions on how to manage risk with a proper exit strategy on out of the money credit spreads. 2 weeks ago I sold the SPY APR 86 calls and bought the APR 88 calls for a credit of $.60. under what conditions would you recommend exiting this trade prior to expiration.
I read following strategy for debit spread. Close half of your position when you've made 50% of max possible profit and then close remaining position once you reached 80% of max potential. Not sure how does this apply for credit spread. Risking $2 for 0.60 cents is a game of high risk/reward ratio and should be avoided unless you are the market maker (or better said market manipulator).
Not true! You are forgetting about the probabilities. Risk/reward is useless without having probabilities attached to it!
There are several reasonable answers 1) Exit when you are satisfied with the profit 2) Exit when there is so little potential profit left to earn that it becomes foolish to take any risk. Translation: Pay 5 (or even 10) cents to close. 3) Close all or part of the position when you are uncomfortable with the potential loss. There are no hard and fast rules that can tell you when you have become uncomfortable. But be reasonable. The maximum loss is $200 per spread. Don't decide to exit when the premium has reached $1.90. That's far too late. At that point you have only 10 cents to lose, and who knows what may happen in the short time remaining. Mark http://blog.mdwoptions.com/options_for_rookies/
1) Regurgitating something you read is not likely to be useful for anyone. Especially when you are not certain that 'what you read' applies to the question asked - credit spreads. 2) The risk is $1.40, not $2.00 3) MTE said it all. This is a viable strategy. The problem you described occurs when traders risk $9.80 to make $0.20 Mark
Very true - it surely looks lot better now after the market-close I get your point - because seller of credit spreads makes profit by time decay or when underlying does not move in the direction in which buyer wants it to move - so scaling out strategy wont apply here. Every day is a learning Mark, I love you rookies book which I got last week.
When I do this trade, I will enter a gtc order to cover at 0.18 (30% of credit). The more important question is how far do you let this move against you. What is the size of you position relative to available margin????
Mark, Thanks for your help. In regard to the maximum loss to take, I feel I trade best when I have rules set up when I enter the trade. I am looking for a rule that will maximize a positive expectancy. Two that I thought about were to close the spread if the Spy's ever reach 86. Another would be to close the spread if the loss becomes equal to the amount of the credit. Do you feel either of these would work well or could you make a better suggestion. Thanks. Kurt